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On the scale of financial intermediaries

Author

Listed:
  • Tobias Adrian
  • Nina Boyarchenko
  • Hyun Song Shin

Abstract

This paper studies the economic scale of financial institutions. We show that banks and security broker-dealers actively smooth book equity by adjusting payouts. The smoothing of book equity is associated with procyclical book leverage and procyclical net payouts. In contrast, market leverage largely reflects movements in valuation levels as measured by book-to-market ratios. The 2008 crisis caused a structural break, after which the growth rates of the banking and dealer sectors have been subdued relative to pre-crisis levels. We draw conclusions for theories of financial intermediation and for capital regulation..

Suggested Citation

  • Tobias Adrian & Nina Boyarchenko & Hyun Song Shin, 2015. "On the scale of financial intermediaries," Staff Reports 743, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:743
    Note: Previous title: "The Cyclicality of Leverage"
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    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    2. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York.
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Tobias Adrian & Evan Friedman & Tyler Muir, 2015. "The cost of capital of the financial sector," Staff Reports 755, Federal Reserve Bank of New York.
    5. Angeloni, Ignazio & Faia, Ester, 2013. "Capital regulation and monetary policy with fragile banks," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 311-324.
    6. Jon Danielsson & Hyun Song Shin & Jean-Pierre Zigrand, 2011. "Balance Sheet Capacity and Endogenous Risk," FMG Discussion Papers dp665, Financial Markets Group.
    7. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    8. Anton Korinek, 2011. "Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses," NFI Working Papers 2011-WP-13, Indiana State University, Scott College of Business, Networks Financial Institute.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Angela Abbate & Dominik Thaler, 2019. "Monetary Policy and the Asset Risk‐Taking Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(8), pages 2115-2144, December.
    2. Sandra Eickmeier & Norbert Metiu & Esteban Prieto, 2016. "Time-varying volatility, financial intermediation and monetary policy," CAMA Working Papers 2016-32, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Juliane Begenau & Jeremy Majerovitz & Saki Bigio, 2018. "Data Lessons on Bank Behavior," 2018 Meeting Papers 161, Society for Economic Dynamics.
    4. Tobias Adrian & Emanuel Moench & Hyun Song Shin, 2013. "Dynamic Leverage Asset Pricing," Staff Reports 625, Federal Reserve Bank of New York.
    5. Timmer, Yannick, 2018. "Cyclical investment behavior across financial institutions," Journal of Financial Economics, Elsevier, vol. 129(2), pages 268-286.
    6. Gambacorta, Leonardo & Shin, Hyun Song, 2018. "Why bank capital matters for monetary policy," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 17-29.

    More about this item

    Keywords

    capital regulations; financial intermediation; macro-finance;

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy

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